Rotation To Fixed-Income Leaps Off The Page

Bozo | Nov 21, 2017 | 1,375 posts since 2011

Every so often, an adjustment to one's asset allocation seems prudent. These days, as I noted, it just "leaps off the page". I've throttled back this year on equities, but, even so, my YTD is up over 17% at Vanguard. Mind you, this was hardly a full-throated allocation to equities. I have (and have added to) VBTLX and VBIAX. Even so, the YTD keeps going up. This, my friends, is scary, and the potential sign of a market top. Is this market-timing? Perhaps. But if, and only if, you intend to plop the harvest back in later. I don't.

Contrarian investors, as am I, see flashing red lights. For those with out-sized gains in Mr. Market this year, rotation of at least part of those gains (the "harvest") might be prudent. Several options: (a) bond funds. While dicey in a rising-rate environment, the risk is much less than equities in a bear market; (b) cash. Returns stink; (c) CDs, my preferred option. Harvest those gains, and, if possible, ladder them into 5-year CDs.

Folks, it's a casino out there. Remember what your Mom told you. "Walk out the door while you have chips in your pocket. If you don't, never mind trying to call me for bus fare."

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gbtexas | Nov 23, 2017 | 78 posts since 2013

You bet it's a casino, Bozo. Just like going to a gambling house and playing the slots, or whatever. As an added caveat, a person's age should also enter into the equation. The older one is, the less likely the chance of fully recovering losses (as you would expect). As most people know, we;'re going to get a correction one day, but when, who knows. So, will it be lean or mean?

We have a guy in our sunday school who lost half his portfolio in 2007 and 08. He only recently restored his balance (within the last year or so). If you're in your 70s or beyond, prudancy and basic wisdom would dictate staying out of anything stock related, as well as long term bond funds.

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Bozo | Nov 25, 2017 | 1,375 posts since 2011

gbtexas, re your comment above, absent special circumstances, I would seldom recommend a total abandonment of equities in one's asset allocation (AA). Reading between the lines, your Sunday School friend must have been seriously overweight in equities (read: 100%) to have lost half in the swoon of 2008 - early 2009.

Conventional wisdom (and the target-fund gurus at Vanguard or Fidelity) might suggest a minimum of 30% equities in one's AA no matter how old one is.

My wife and I are both 70, and find anything from 35% to 40% equities well within our "sleep-well-at-night" range. I've been harvesting gains of late for two reasons: (a) it's much easier to sell when others are buying, and (b) I'm a sore loser. I hate to see green fade to red. I'm very happy plopping those gains into the proverbial "lock box".

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Bozo | Nov 25, 2017 | 1,375 posts since 2011

Moving along, some of us old-timers still subscribe to the "bucket" approach. The trick is to have enough in a "bucket" of fixed-income to last until your life expectancy. For example, at age 70, you tap the fixed-income for 15 years or so. You let the balanced funds (60/40) ride. From time-to-time, when equities are on a tear (as they were this past year), you whack off a little to add to the lock box. At age 85, should you still be alive (or your wife), you can begin drawing down on your balanced (60/40) funds (the second bucket). The third bucket is after-tax CDs for long-term care/assisted living. The fourth bucket is the house. The fifth bucket is the condo. My wife gave up wondering if she might die broke long ago.

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Bozo | Nov 29, 2017 | 1,375 posts since 2011

I sold another 20 shares of VFH today. I suspect few are surprised.

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Kaight | Nov 29, 2017 | 1,192 posts since 2011

Hi, GB

That is an interesting story about your Sunday school friend. I have no friends who lost that much. Mostly mine were in the range of 30%-40%. I was retired back in 2008 so not in a position to lose even 10% of my nest egg and remain happy. Hence I was not in stocks. I was borrowing money back then though, short term, to put into CDs because I thought rates would descend. That strategy, lucky for me, worked out. And it was pure luck. I have no ability whatsoever to predict the stock market. My crystal ball where direction of interest rates is concerned is only slightly less cloudy.

I loved my mother and dad (both long ago deceased) very much. But our family was not at all wealthy. Mother and dad taught me a lot; but nothing regarding wealth management. I realized the deficit back in the 1960's and sought to educate myself as best I could. First I relied on books. But later I became an AVID listener to talk radio "money" programs. I simply could not get enough of that, and I was fortunate to have access to radio programs out of both New York and Philadelphia. I would even awaken at 6:00am, every Saturday morning, to listen to a really smart, young, money guy broadcasting out of a small NYC radio station. Today that same guy, now MUCH older, broadcasts every Sunday nationwide. His name is Bob Brinker.

Anyway, one thing I noticed early was the stock/bonds breakdown mantra most all of the money folks spouted. Go for more stocks for growth when you're younger, then shift slowly over to fixed income as you age. That, in general terms, was the oft-repeated recommendation. It occurred to me, quite early on, how well that scheme fed the income needs of people working on Wall Street. Consider this:

If everyone invested only in certificates of deposit, for example, or in real estate, or in (whatever) investments other than stocks and bonds, Wall Street denizens would be making a LOT less money than they otherwise would make!! Their globe trotting vacations and their summer homes in the Hamptons all would go POOF! So why would anyone who benefits when we peons buy stocks and bonds . . . not recommend stocks and bonds!!! And their concoction of fancy, complicated, balancing strategies was icing on the cake, designed to demonstrate their superior financial acumen and management prowess. While I never bought into their schemes, I readily acknowledge their genius when it comes to making money . . . . for themselves.

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Bozo | Nov 29, 2017 | 1,375 posts since 2011

Kaight, I came from a family of modest means, as well. That said, the frugality gene was dominant. One thing I learned at an early age: "how" one saves is less important than "whether" one saves. Saving is the key.

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Bozo | Nov 30, 2017 | 1,375 posts since 2011

Sold again this morning. 10 shares of VFH, 10 shares of VTI. This market is crazy. Take a deep breath, assume irrationality, sell when others are buying. It's much easier that way.

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Kaight | Nov 30, 2017 | 1,192 posts since 2011

Bozo the (by now) customary caveat: I am unable accurately to forecast the stock market's direction. That said:

Despite new all-time highs, I am not smelling irrational exuberance at the present juncture. If tax reform passes, as now appears likely, the sky's the limit for this stock market and interest rates will normalize as well. Everything depends on Trump. But more and more he seems to be getting a handle on his opposition. Equally important, though it has taken forever, increasing numbers of Trump's appointments are finally being confirmed and are unseating the Obama holdovers. Winners are replacing losers. This has the effect of releasing a gargantuan brake on the American economy. Consider:

Revised Q3 GDP numbers are now showing 3.3% growth. This on the heels of 3.1% in Q2. This big Q3 number came despite three major hurricane hits (TX, FL, PR). Had weather conditions been benign, that 3.3% would have been between 3.5% and 4%!!

Trump, a truly remarkable individual, is successfully negotiating the POTUS learning curve. How he manages it, in the face of unprecedented, massive pushback from the swamp (Demos, Repubs, press) I have no clue. I guess it is dawning on me why Trump is a billionaire . . . and I am not close. He is showing everyone how it is done. I have not witnessed Presidential resolve like Trump's since 1981 through 1984. Leadership is everything. Trump is providing America with long-missing leadership, and America is responding!!

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Bozo | Dec 1, 2017 | 1,375 posts since 2011

Kaight, I see no point debating the merits/demerits of Trump. Just give me my (unrealized) capital gains. As I noted elsewhere, I never let social responsibility get in the way of personal profit.

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Kaight | Dec 1, 2017 | 1,192 posts since 2011

Demerits? Not seeing any. But then, I do not live in California. My state went for Trump! :-)

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Bozo | Dec 1, 2017 | 1,375 posts since 2011

Kaight, today was a "I can't believe it" selling opportunity. Whether one resides in a red or blue state, it's time to book green. Just a little "color" humor.

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Kaight | Dec 1, 2017 | 1,192 posts since 2011

Bozo I simply lack your keen ability to forecast stock market movements. I bow down before your vastly superior prescience.

That said, my information is that only between 20% and 40% of positive reaction to tax reform is already in the market. Now conceded, success in the Senate is still up in the air, following which would come reconciliation and the necessity of passing the compromised legislation through both houses of Congress. We remain today far distant from a sure thing. But IF tax reform should somehow eventuate . . . . ka BOOM!!

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Bozo | Dec 1, 2017 | 1,375 posts since 2011

whack; red =

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Bozo | Dec 1, 2017 | 1,375 posts since 2011

Kaight, I suspect we can all agree the stock market is bonkers on steroids. Look at today, Mike Flynn does the obvious, and the market tanks. MSNBC is going ballistic.

Mind you, I'm a Republican in a very blue state, so it's hard to engage.

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johnbaker | Dec 15, 2017 | 8 posts since 2017

This is really interesting...

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